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Austrian School Explanation, Other Debtly Matters


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Don't think I can agree with that as being a healthy diet for modern humanoids. Preliminary studies seem to indicate that as people age, amazingly MORE protein seems to be needed for healthy brain function, and monounsaturated oils like olive oil are also needed to stave off degenerative disease. Olives are inedible unless processed with things like lye -- so much for nomadic hunter-gatherers.


One also might bear in mind that the human body in earlier eras was worn out by about the age of 35. Although hunter-gatherers might have had an easier time of it when game was plentiful, in times of drought or climatic change they would die off quickly without food reserves. Agriculture is more work but safer -- and the combination of agriculture with animal husbandry (which provides a greater amount of protein) has led to longer life spans. What may have been the optimal diet for a creature that dies by the age of 35 may not be the optimal diet for one that can expect to live to be 75.


Personally I think the optimal diet for internet addicts probably includes lots from the basic food groups: chocolate, chips, cola, and Hostess cupcakes/Ding Dongs/Ho Hos.


And don't bother making jokes about animal husbandry -- I think we've QUITE exploited the animal cruelty jokes for the weekend in Yobob's Piggies thread. :grin:

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I didn't get into a long oratory because I have done enough of it over the last 2 years to fill volumes. Sometimes the urge to answer diminishes, just as responding to a two year old's planitve cries of "why?" becomes tiring.


Hyper delves into the banking side of the issue while I have focused primarily on the debt levels. In the 50's it took about $1.40 of new debt to create $1 of additional GDP, or GNP if you prefer. That ratio over time has changed to where it now takes well over $5.00 of new debt to create the same $1 increase in GDP. If Easy Al had frozen rates at 6.5% when the stock market started collapsing, we would have seen huge amounts of debt and misallocation of capital wiped out in a very short time. Yes the economy would have crashed hard and fast. However the excesses would have been reduced sufficiently that it would have effectively allowed the business cycle to begin again. Instead by taking rates to negative levels artificially the FRB has not allowed the purging of the exceses of the system, which frees up capital for realloction to more productive uses. Instead they have done the opposite, they have encouraged more debt without clearing the old debt.


This would be bad enough if our debt had been based on our internal savings and profits, such as Japan's debt is internally financed. However we don't make things anymore. Our manufacturing employment is now at the same numerical level as 1961. Due to the easing of trade rules we have effectively exported our manufacturing base, and in many cases literally the machinery used for that manufacturing. This means we have run huge deficits in trade. When we buy a foreign product, that money eventually ends up in the hands of a foreigner in the form of $US. They have two choices. They can either buy something denominated in dollars, like US equities, US mortgage bonds, US treasuries, products made in the US, or US capital assets such as Mercedes buying Chrysler or some foreign company buying your municipal water system. As long as those foreign held $US are reinvested in $US assets (we are effectively borrowing 1.5 billion dollars a day from foreigners profits and savings) the system will wobble on from that standpoint.


In order to keep the debt expansion going, lending standards have been reduced to the point of being non-existant. Down payments have been virtually eliminated, debt to income ratios have been increased to absurdly high levels, and weak credit historys are a non-issue. They are literally scraping the bottom of the barrel in order to find borrowers. This serves to disguise the default ratios as long as the bubble keeps expanding at a sufficient rate. When the expansion slows just a little, all of a sudden default rates soar; not because the number of defaults is larger, but as a percentage of the total portfolio they loom larger bringing into question solvency ratios of the lender. Providian and others are examples of this happening. It always starts at the fringe of the system, which in this case is sub-prime, and will eventually work it's way to the core.


As these default ratios climb and begin impacting the solvency of the lenders they are forced to tighten lending standards, further slowing credit expansion which in turn increases the default ratios to a point that the lender is no longer solvent. As lenders fall, credit standrds become tighter and tighter. Soon enough you reach a point where the survivng lenders are awash with money but can find few willing or worthy borrowers.


We are early in the process, but it has started. We have had two straight months of reduction in consumer borrowing. Commercial lending has been in a steady decline for over 2 years. The only thing still moving is mortgage debt, but even that is showing signs of exhaustion. Mortgage rates have fallen to their lowest point in over 40 years and additional small declines don't seem to be able to increase the lending any further. We have maxxed out on debt.


In the meantime job losses continue to mount and the duration of unemployment is getting longer and longer. When people run out of unemploymet benefits, the govt. no longer counts them as unemployed. They become non-people. They have dropped millions off the roster of "people" and those people no longer impact the unemployment rate. By doing so the govt is giving a false reading on the number on unemployed in this country. It is quite likely that the number is double what the govt. reports. This is verifiable by the states reporting sharp declines in income tax receipts. Yes a lot of that is due to reduced capital gains taxes, but certainly not all of it. Those reductions in income have now started showing up in reduced sales tax revenues. The govt. can use all sorts of statistic juggling to show small increases in spending but it doesn't fit with what sales tax revenue is showing.


The big picture. Aggregate debt has maxxed out. Aggregate incomes are falling. Aggregate savings by citizens is extremely low. Job losses continue to mount. Aggregate net worth has fallen sharply in two years inspite of a bubble increase in housing worth. Aggreagte mortgage equity has fallen due to re-fi cash-outs inspite of large increases in property values . 12 interest rate cuts to effectively negative rates have not spurred any upturn in the economy outside of the financial sector. Those rate cuts provided a boost to the financial sector but as we move further away from them they begin to lose that ability to enhance profitability. Cap-ex is still falling as companies struggle with non-productive debt accumulated during the 90's. Capacity utilization is at about 75% and there is no incentive to invest in new plant and equipment until that utilization rate climbs significantly.


In short we are screwed.

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Guest Icky Twerp

Cross-Currents.com has some of the best charts on the web.


Last Summer, I particularly liked the DJIA Annualized Returns chart. I'd never seen that before. It clearly has three peaks, where most charts of DJIA I've seen have only 2. What is "missing" though is the back side of that third peak, which is in the future.


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Guest Icky Twerp

So I built a spreadsheet out of the data on that chart (somewhat imprecisely), then extrapolated the future returns, using 1929-48 & 1965-91 as templates! Sort of a poor-man's Austrian School presentation.


What is interesting from this extrapolation is the suggestion from both preiods that returns would bottom out until 2018...8^0...


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Guest Icky Twerp

Then, I extrapolated the DJIA Highs for the same period, using those returns as a guide (piling absurdity ontop of absurdity, I know!).


Although the trend lines from those two template "down slopes" differ a great deal, they both show a sharp drop down to 4000, then stagnancy until 2030.


Maybe HyperTiger is too Hyper, maybe Yobob! is too Yo! Maybe the Good Doktor is too hyperbolic when he says, "this market is [/b]toast... but then maybe not.


1 + 1 ought to be 2.

What comes up most go down (the natural Law of Economic Gravity)


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